In general, if you receive income from the rental of a dwelling unit, such as a house, apartment, or duplex, you can deduct certain expenses.

Besides knowing which expenses may be deductible, it's important to understand potential limitations on the amounts of rental expenses that you can deduct in a tax year.

There are several types of limitations that may apply.

Not-for-profit activities:

  • If you don't rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income, and you can't carry forward rental expenses in excess of rental income to the next year. However, deductions that are allowed regardless of whether an activity is for-profit (e.g., certain real property taxes and mortgage interest) are not subject to this limitation.
  • Refer to Publication 527, Residential Rental Property.

Rental of a dwelling unit (for profit):

  • The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes depends on how many days you used the unit for personal purposes.
  • Renting to relatives may be considered personal use even if they're paying you rent, unless the family member uses the dwelling unit as his or her main home and pays rent equivalent to the fair rental value.
  • Refer to Publication 527.

Passive activity losses:

  • In general, you can deduct passive activity losses to the extent of passive activity income (a limit on loss deductions).
  • You carry any excess loss forward to the following year or years until used, or you carry any excess loss forward until the year you dispose of your entire interest in the activity in a fully taxable transaction.
  • There are several exceptions that may apply to the passive activity limitations. Refer to Publication 527 and Publication 925, Passive Activity and At-Risk Rules.

At-risk rules:

The at-risk rules limit your losses from most activities to your amount at risk in the activity.

  • You treat any loss disallowed because of the at-risk limits as a deduction from the same activity in the next tax year.
  • If your losses from an at-risk activity are allowed in a previous taxable year and your amount at risk drops below zero at the close of any later taxable year, then you must include a recapture amount in your income from the activity for such later taxable year.